Applying for a House Construction Loan? Here are few Things to Remember
Jun 12, 2018 Home Loan
House construction loan refers to the loan that is used for construction purpose. It is a kind of home loan but a bit different from other home loans.
So, if you are planning to apply for a house construction loan you should remember certain major points.
So, if you are planning to apply for a house construction loan you should remember certain major points.
- The house construction loan is usually disbursed in two to five instalments which depend on the loan-to-value (LTV) ratio, size of the loan and the progress of construction. Therefore you need to ensure that you have adequate funds available to buy necessary materials in order to begin the construction on time.
- The disbursement of the loan amount depends on the progress of the construction. If the construction happens in a timely manner then the loan amount also gets disbursed in a timely manner. But if there is any delay in the construction process then the disbursement of the funds could get delayed or even cancelled due to the reason that the banks is able to disburse the loan amount as per the stages of the construction. Such as if the loan has been taken for the 85 percent of the estimated construction cost then the first instalment will be disbursed after the completion of the foundation work. The second disbursement will happen during the lintel level. The third level of disbursement will happens when the concrete work gets completed. And the final instalment of disbursement will happen when 90 percent of the work will get complete. And if 50 percent value of the estimated construction cost is take as the loan then the first instalment will be disbursed either after the concrete work get completed or after the completion of the lintel work.
- The borrower has to keep paying pre-EMIs every month till the final amount gets disbursed. The loan applicant has to pay the interest as the part of every instalment for the disbursed amount. However the amount paid is not the part of the principal loan amount. Even if the construction gets delayed, the borrower has to keep paying the interest to the bank which can be a huge burden on the borrower.
- If there is any deviation from the approved original construction plan, then the bank will not disburse the loan and could also freeze the loan. The bank has access to the entire construction plan and for any additional changes in the construction plan, you need to take approval from the bank.r
- There are different tax benefits for house construction loan. If the construction process is in progress, then the borrower is eligible to avail the tax benefit on the interest paid. But the borrower cannot avail the tax benefits on the principal and the interest amount like home loans. However, if the borrower choose to start the EMI after disbursal of the first instalment then there is no tax benefit on the principal amount paid till the construction gets completed and the bank certifies that the full amount has been disbursed.
- It is important to understand that the house construction are not meant to fund the interior works such as furniture, kitchen cabinets, interior decoration, lighting, plumbing or any other works. However, the borrower should check about what all is included or excluded in the loan to make necessary arrangements and avoid hassles in future.
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